Euro zone inflation nears ECB goal, record joblessness

BRUSSELS (Reuters) - Euro zone inflation fell to a two-year low in January as companies cut prices at a time of record joblessness, potentially giving the European Central Bank more scope to lower interest rates later this year.

Inflation in the 17 countries using the euro fell to 2 percent in January compared to a year ago, the EU's statistics office Eurostat said on Friday, its lowest level since November 2010 and well down from a 3 percent peak in September 2011.

That puts the annual rate of increase in the cost of living just shy of the ECB's target of close to, but below 2 percent.

With Eurostat figures also showing euro zone unemployment at a record 11.7 percent of the working population in December, the ECB appears to have room to lower rates again to stimulate an economy that has slipped into its second recession since 2009.

"Inflation is non-existent," said Thomas Costerg, an economist at Standard Chartered in London. "Now with German inflation decelerating, that will fuel debate about how the ECB will ease policy," he said, forecasting a cut in the ECB's main refinancing rate in the second quarter.

For the past year, inflation has been driven by oil prices and tax increases, but stripping out those factors, annual consumer price rises are around 1 percent, reflecting the weakness of the economy.

The ECB's governing council kept rates at 0.75 percent at its January meeting and will discuss rate policy again on February 7. The decision to keep policy on hold was unanimous last month, but economists are still divided over the ECB's future moves.

Thirty-eight out of 73 analysts polled in January by Reuters said the ECB will remain on hold in the first quarter. None expected a rate cut next week.
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